Thursday, December 3, 2009

As the Obama administration holds its jobs summit today, I would like to make a contribution to the debate.

To begin with, consider this chart, which takes the monthly establishment survey of jobs and breaks it down into two components: public sector (federal, state and local) and private sector. Note that the two y-axes are set up so that they both show an equivalent percentage change from bottom to top (12%). Note further that over the past 10 years private sector jobs are down, while public sector jobs are up almost 10%. Public sector jobs rarely shrink (with the exception being census years, when lots of people are hired and then fired); they simply ratchet ever higher. Private sector jobs, however, can drop significantly, as they have in the past two years. The public sector hardly knows the meaning of sacrifice when it comes to jobs, while the private sector ends up bearing virtually the full brunt of every downturn. Note also that at the peak of the last expansion (Dec. '07), the private sector accounted for about 84% of all jobs. Government (fortunately) still plays a relatively minor direct role in total job creation.

But government does play a huge, indirect role in private sector job creation, since most—if not all—recessions are the result of major government policy mistakes: usually erratic monetary policy, and more recently unwise market intervention (e.g., FNMA, FHLMC, affordable housing mandates). Recessions can be also be prolonged by policy mistakes. Extending unemployment benefits reduces the incentives of workers to find jobs; deficit spending absorbs funds that might otherwise be used more productively by the private sector; tax credits can distort economic incentives; high marginal tax rates can reduce the private sector's willingness to take risks; erratic policymaking and government mandates can increase uncertainty about the future and thus reduce the private sector's willingness to hire.

Following the advice of people like Mark Zandi, who yesterday proposed a series of measures supposedly designed to create jobs, and which could cost upwards of $300 billion, would do very little if anything to create jobs. The litany of poor ideas is familiar: extend unemployment insurance benefits, spend more on infrastructure, create a tax credit for hiring, make more money available for small business loans, give more aid to states. It would instead be much better to focus on policies that create new and permanent incentives for the private sector to create jobs: lower corporate tax rates, lower payroll taxes, reduce government mandates, reduce the taxes on capital and dividend income.

We need the government to get out of the way of the private sector, by reducing government jobs, reducing government regulation and intervention in the markets, and increasing the rewards to work and investment.

... (the) proposed tax credit would bias firms toward producing output by using more labor and, hence, would likely increase employment in the short-run. But the flip side of this effect is that this tax credit would thereby bias firms away from producing output by using more machinery, R&D, and other capital investments. Because in the long-run workers’ wages are determined by their productivity – and because worker productivity rises with greater, market-driven capital investments – (the) proposed tax credit, by biasing firms away from capital investments, will cause future real wages to be lower than otherwise.

A cut in corporate-profits taxes, in contrast, would simultaneously prompt firms to expand output – and, hence, hire more workers – without biasing firms against making the capital investments that are the indispensable engine of economic prosperity and growth.

6 comments:

I think I will side with the opinion expressed in today's WSJ op-ed. Bernanke has done a decent job dealing with the financial crisis that appeared over a year ago, but he was also one of those responsible for creating the crisis in the first place. He has demonstrated time and again that he doesn't understand what causes inflation, and he pays way too much attention to the economy (e.g., the degree of economic slack) and way too little attention to market indicators of the effective stance of monetary policy (e.g., the value of the dollar, gold, commodity prices and the slope of the yield curve).

I would prefer to see someone in the post who truly and consistently believes in a strong dollar and very low inflation, and who believes that monetary policy is a tool that works only to control inflation, and not economic growth. Bernanke pays only lip service to the dollar, and he appears willing to sacrifice low inflation in order to attempt to micro-manage the economy.

Going back to Supply Side Economics, one component of Supply Side is the reduction in the size and scope of government.

Looking at the Laffer Curve, one can clearly go past equilibrium in regards to taxation. That taxation is a reflection of the size and scope of Government. Meaning that when equilibrium of taxation is violated, then size and scope is out of equilibrium.

Taxes can be put into a percentage. One can put a number onto total taxes collected.

One can easily count heads, see the number of departments, see the number of buildings housing government, see numerous department budgets and get a grasp on the size of Government.

The Scope of Government is much more difficult to grasp. “Scope” is Control leading to Regulation. What aspects of the Economy is the government going to control? What kind of spider web has Scope produced within the economy.? How does that Scope cascade down through the economy? How difficult is it to reverse Scope?

Scope is directly related to Size. One can’t ride herd on scope without plenty of Control Cowboys. The increase or decrease in Scope is directly related to how many Control Cowboys are necessary.

Any argument for Regulation is an argument for Scope which is really an argument for Size.

Scott:I heard Mark Steyn say that Tim Horton Corp. which does business in Canada and the US and which is a Delaware Corp. say that they are going to reorganize as a Canadian Corp. to take advantage of Canada's tax rates. I was half asleep when I heard it, maybe I was dreaming.

Last time I checked, Canada's tax rates weren't significantly different from ours. But if ours go up to finance Obama's spending proposals, then I wouldn't be surprised to see a lot of companies pull up stakes here and go elsewhere. In any event, our corporate tax rate is the highest in the industrialized world, and that is not a good thing.